UK: Buy-To-Let Property

Buy-to-let property

With extra stamp duty land tax on the purchase of additional
residential properties and the new restriction on relief for
finance costs, landlords need to take action to minimise the impact
of these changes.

Extra stamp duty

Since 1 April 2016, anyone buying a second or subsequent UK
residential property has been subject to a 3% stamp duty land tax
(SDLT) surcharge. This can add substantial cost to a buy-to-let
property purchase, as shown in the following example.

Restriction on finance costs

As a residential landlord, you're currently able to claim
various costs of financing your buy-to-let property as an expense
against rental income. This includes interest on servicing debt
used to fund the rental business and any incidental costs of
obtaining or repaying finance. Income tax relief is available at
your marginal rate of 20%, 40% or 45%. In some cases, this can
produce a rental loss for the tax year, which can be carried
forward and offset against further rental profits from the same
property business.

From April 2017 however, if you're subject to income tax,
you will have a restriction applied to the relief you receive on
the finance costs of running your rental business. This will apply
to interest paid on any debt, as well as the costs of obtaining or
paying off finance. Partnerships and trustees are included,
although there is a specific exclusion for non-UK resident
companies subject to UK income tax and for furnished holiday lets.
The restriction will completely remove any finance costs from the
tax calculation and introduce a basic rate tax credit, equal to 20%
of the related finance costs. To further complicate matters, this
tax credit will be restricted where the property profits are less
than the finance costs, ensuring that the finance tax credit is not
given against tax on other sources of income. If the finance tax
credit is restricted, the excess can be carried forward and used in
future tax years.

This restriction will be phased in from 6 April 2017 and fully
implemented from 6 April 2020. From 6 April 2017, 25% of finance
costs will be disallowed and subject to the basic rate tax credit.
This will increase by 25% each tax year until the restriction
applies to the total finance costs. Some landlords may see their
tax bill increase by more than the difference between their
marginal tax rate and the 20% tax credit.

Impact of the restriction

An increase in rental income may have the following
consequences.

Your income may be pushed above £100,000, resulting in a
reduction in your personal allowance.

Your income may be pushed into the additional rate band (above
£150,000), with the associated decrease in your annual
pension relief allowance.

Other income, such as dividends and savings, may be taxed at a
higher marginal income tax rate.

Minimising the impact

You can take action to minimise the impact of these changes.
These actions are likely to be suitable if you have a high
loan-to-value rental business and pay a high proportion of finance
interest. Suitability will, of course, depend on your circumstances
and intentions.

One option is to incorporate your property business, as the
income tax provisions restricting the deduction of interest costs
related to residential property will not apply to companies. We can
advise on all tax and accounting aspects (including potential
liabilities) of the process, including the availability of
incorporation relief and the impact of SDLT. There will be non-tax
issues to consider in changing any structure and these could
include whether your lender would still keep the same terms. You
might consider incorporation if you have a large property
portfolio.

Other ways to reduce the impact of the tax changes may be to
involve your spouse or children in the business or to cut business
debt. We can advise on the tax implications of these alternatives
too.

Since we have seen a focus and clamp down on tax avoidance/evasion and suggestions in the media that tax planning of any form is immoral if not illegal, some people have become nervous about taking any tax planning steps at all.

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